An Agile Accounting Model: Key To Enterprise Agile

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An AgileAccounting Model: Key toEnterprise AgilePat Reed & Walt WyckoffAugust 15, 2012

OverviewWhat ‘s this session about? Perspectives: de-mystifying Agile project cost accountingPatterns: mapping current accounting standards to an Agile project accounting modelPartnerships: building relationships and co-creating a practical, scalable and defensiblesolutionHow will do we that? Lightning talks and discussions (20 minutes)Brainstorming “breakout” workgroups (20 minutes)Shared learnings and conversations (15 minutes)Guided group solutioning, review and Q&A (35 minutes)Key Learnings: A deeper understanding of accounting principles and perspectivesPractical ideas for solving Enterprise level agile accounting and related problems

Background Explosive and strategic growth of technology in the 90’sRecognition that internal software developed via Agile should be capitalizeddifferently Mandatory accounting guidelines require:Ø Ø Ø Ø Standardize financial reportingReduce inconsistencies across companiesBetter enable investors to make informed decisionsGuidelines were designed around a phased, waterfall based IT investment modelØ Organizations to define and report IT development costsIT projects delivered in discrete preliminary, development and post implementation phasesAgile delivery models have inherent friction with legacy accounting practicesBefore Agile can scale:Ø Ø The accounting issue needs more clarificationAgile software and project accounting practice needs to be developed

Accounting Background1.2.SEC requires that GAAP be followedFASB is the highest authority in establishing generally acceptedaccounting principles for public and private companies, as well asnon-profit entities3.AICPA SOP 98-1 and GAAP ASC 350-40 Internal Use Softwareprovide guidance on how to apply GAAP principles and are writtenin language designed around a waterfall SDLC4.Corporate accounting policies have been applied using the SOP98-1 language5.Accountants value accuracy and predictability and embraceprinciples of conservatism and consistency6.Accountants don’t understand Agile

Software Capitalization – What is it?1.Software developed internally can be classified as an asseta.Can be capitalized if it will be used in production for more than one yearb.The cost of a capitalized asset is depreciated over a number of yearsc.Software that has been expensed is not classified as an asset2.Depreciate the value of the software asset over timea.Corporations are taxed on profits – depreciation costs reduce tax year profitsb.Reduces tax liability3.What can get Capitalizeda.Software in beneficial use substantially beyond the end of the current tax yearb.New software that has a useful life substantially beyond one yearc.Improvements that prolong the life of the softwared.Adaptations that permit the software to be used for a new or different purpose

Relevant GAAP1.Objectivity principle: the company financial statements should bebased on objective evidence.2.Materiality principle: the significance of an item should be consideredwhen it is reported.3.Consistency principle: The company uses the same accountingprinciples and methods from year to year (note: referenced bydocumented policies)4.Conservatism principle: when choosing between two solutions, the onethat will be least likely to overstate assets and income should be picked

What’s The Challenge?1.To ensure compliance, IT managers must estimate, allocate, track and report Agileproject labor costs to internal IT projects based on project work done in threespecific phases: Preliminary, Development and Post Implementation2.Organizations utilizing a traditional waterfall model can readily adapt their laborand project costing to the guidelines using the following framework:Preliminary - - - - - - - - Development - - - - - - - - - - - - - Post Implementation - -

Waterfall MethodologyEffort4monthsTime

Agile MethodologyTimeIteration 1234564 monthsEffort

Agile Development RoadmapProject Release Dev.QARelease esignDev.QAAnalysisDesignDev.QARelease N esignDev.QARelease N 2 ThoughtWorks, 2006Q - How can Agile organizations ensure compliance and accurately estimate,allocate and track labor costs to IT projects based on project work done in threespecific phases when analysis, design, development and QA work is continuouslyrepeated and intertwined throughout each iteration?A – Partner with IT Finance / Technical Accounting / Financial Reporting / Auditto customize a simple, defensible and sustainable solution that’s consistent withAgile Principles, Accounting Principles, SOP 98-1 and ASC 350-40

“Problems cannot be solved by thesame level of thinking that createdthem.”Albert Einstein

“What we know sometimes gets inthe say of what we need to know.”Pat Reed

Exploratory Ideas1.Puzzles, Patterns & ParadigmsoAs Agile “experts” – why do we fall into the same “trap”?oIdea: reframe our agile mental models2.Principles & PartnershipsoWhy is Agile Accounting a point of friction?oHow can we help accountants understand Agile?oIdea: Advocacy – let’s understand accounting principles & CSF’soIdea: Partnership - Creating a shared language and culture – and cocreate a solution3.Clarify the benefits of AgileoIdea: In an accounting and financial ROI contextoIdea: Map GAAP to Agile practices

“The seeds of change are inthe questions we ask”Pat Reed

Brainstorm

Activity:From an Accountant’s orCFO’s perspective 1. Walk through SOP 98-1 and draft an Agile Accounting Solution.2. Talk through the GAAP principles of conservatism and consistency and discussthe importance of accuracy, predictability and risk mitigation. Compile a series ofquestions that reflect what an accountant and CFO need to know about Agile.3. Design talking points to present to your CFO to “sell” Agile. How can you helpthem understand the benefits of Agile re: GAAP?

What’s Important to Your Accountant,and What They Need to Know About Agile

Pitching Agile to Your CFO

Deeper Dive into Agile Accounting

Critical Success Factors or Tests SimpleDefensible / AuditableConsistent with SOP 98-1 and GAAPScalableSustainableEasy to understand, interpret, implement, administerValue and risk balanced

Agile AccountingTimeIteration 1234563 monthsWhat happens before Iteration 1 begins?Effort

Agile Project StagesooThe Preliminary Project: “ What “The Development Stage: “ How “– design of software, configuration and interfaces– coding, retrospectives, testing– Hardware installation and preparing software for intended useo“When” Does The Development Stage Start & End Design Storming is the clear bright line between the preliminary (what)and the start of development (how) phases. Auditable deliverable:capture and store e-mail as evidence of management approval toproceed to development 72 hours after production build and final user acceptance testing is theclear bright line for development to end and the “post-implementation”phase to begin (note: during these 72 hours, the development teams areon point along with the Release team and only after the 72 hours,transfers to production support).22

Key SOP 98-1 Guidelineso3 Stages of an IT project: Preliminary Stage – Costs must be expensed Application Development Stage – Most costs should be capitalized Post Implementation Stage – Costs must be expensedoCapitalization begins when the preliminary project stage is completed and management, with the relevant authority authorizes and commitsto funding a computer software project it is probable that the project will be completed and the softwarewill be used to perform the function intended.oCapitalization ends no later than the point at which a computer softwareproject is substantially complete and ready for its intended use.

An Agile Approach . . .Step 1: Paradigm shift: let’s suspend our knowledge of thedifferences between Agile and Waterfall .and take a new lookat the “waterfall centric” project stage framework through anAgile lensStep 2: Adopt an Agile Project Stage FrameworkStep 3: Standardize on a lightweight process to capture evidenceof management authorization and commitment to projectfundingStep 4: Apply and adapt this framework to your organization

Scorecard Does this solution clearly address the 3 stages of an IT project?1.Preliminary (expense)2.Development (mostly capital except for administration, overhead,training and data conversion costs)3. Post Implementation (mostly expense)Have we documented management authorization of funding?Have we assessed probability that the project will be completed andresulting software used to perform the function intended? When do we define that the software is complete and ready for it’sintended use? Would this proposed solution provide a defensible, auditable, scalableand sustainable solution? Is it consistent with GAAP and FASB (SOP 98-1)?

Agile Project StagesooooThe Preliminary Project Stage is analogous to research anddevelopment activities, primarily expense and covers the conceptualformulation and evaluation of alternatives, determination of existenceof needed technology and final selection of alternatives (The What).The Development Stage covers all work related to The How: design ofsoftware, configuration and interfaces, coding, retrospectives,installation to hardware, testing (including parallel processing) and allwork preparing the software for its intended use.Standardize on a clear bright line between the preliminary (what) andthe development (how) phases, and capture evidence of managementapproval (which marks the start of capitalizable work): DesignStormingStandardize on an equally clear bright line that marks the end ofdevelopment which concludes when all iterations of the project arecomplete and the asset is ready for its intended use and placed inservice (which includes all deployment work necessary to get thesoftware into production as well as production testing, acceptance andstabilization): 72 hours after production implementation and final useracceptance testing.

Stage 1: Opportunity ionCustomerEvaluationCustomerEvaluation ThoughtWorks, 2006CustomerEvaluation

OpportunityAssessment:ExpenseExpense vs. CapitalCustomer EvaluationsFeasibility AnalysisBiz Case / Inception DeckTreatmentDesign Storming Feature 1Release N: Theme Feature 2 Feature 3RReleaseBacklog Story 1 Story 2 Story 3 Story Iteration 1 Iteration 2 Iteration 3 Iteration Story 1 Story 3 Story 5 Story 8 Story 2 Story 4Capital Story 6 Story 7 Story 9 Story 10Backlog Story 11 Story 12 Story

Costs can be Capitalized once the “Approval to Start” has been approved and end at the completion ofthe Application Development stage.Preliminary ProjectProjectPhasesTreatment & Preproject tasksPostImplementationApplication DevelopmentInceptionQuick StartDesignStormingIt 0It 1It 2It 3It 4 It n72 HrsCostallocationExpenseCapital and ExpenseExpense OnlyWhat HowCapitalization BeginsReleasesReleaseReleaseCapitalization EndsReleaseReleaseRelease Last set ofstoriesdeployed.Release The Preliminary Project Phase: “What“ (Inception & Quickstart) When the project team has completed the feasibility analysis and the review of the “epic” stories is complete, thePreliminary Project phase is complete. The Development Stage: “How “ design of software, configuration and interfaces coding, retrospectives, testing Hardware installation and preparing software for intended use “When” Does The Development Stage Start & End Design Storming is the clear bright line between the preliminary (what) and the start of development (how) phases. It’simportant that TM’s capture and store e-mail as evidence of management approval to proceed to development 72 hours after the last production implementation, final user acceptance testing and Site Ops handoff is the clear brightline for development to end and post-implementation to begin.

Preliminary Project Costs oStrategic decisions to allocate resources between alternativeprojectsoDetermining performance requirements (what do we need thesoftware to do) and high level systems requirementsoVendor product demonstrationsoExploring alternatives (Buy vs. Build)oFeasibility AnalysisoVendor selection

Clear Bright Line Critical Success Factor: It’s important to captureevidence of management authorization (withtime and date stamps) to document transitionfrom expense (preliminary phase) to capital(development phase) of the project This clearly marks the transition from the“What” to the “How” Memorializing and documenting thisauthorization is critical for future auditability

Stage 2: DevelopmentoMost costs should be capitalized: Designing the chosen path, including software configurationand software interfaces Refinement of requirements (i.e. creation of detailed UseCases or Stories, which have a lifecycle and evolve as theytransform and mature) Internal and external labor costs and fees associated withdevelopment (design, build, test, implement) Costs to develop or obtain software that allows for access orconversion of old data by new systemsoCosts that Should be Expensed Include: Training and Data Conversion (except as noted above)

Stage 3: Post Implementation Another clear bright line: 72 hours afterimplementation and production acceptance Post Implementation (Expense) examples include:oSupport turnover and trainingoCertifying operational systemoPost implementation reviewoCollecting and analyze process dataoOngoing MaintenanceoTransformation / process reengineering / workforce restructuring

DiscussionQ&A

Useful References Link to SOP 98-1 ocs/14201/0031.pdf MindTools: http://www.mindtools.com/pages/article/newTMC 91.htmFASB - Financial Accounting Standards Board: http://www.fasb.org/st/Generally accepted accounting principles:https://en.wikipedia.org/wiki/Generally Accepted Accounting Principles%28United States%29#Assumptions .com/steve -management-to-a-cfo-.html to-agile/

Retrospective1.What are your observations and thoughts about today’ssession?2.What new information was the most impactful for you3.What puzzles you about the information presentedtoday?4.What obstacles do you see that could impact your use ofthe materials we covered today?5.What ideas and recommendations do you have to share?

AgileAccountingPat Reed & Walt iz.com800-542-8184

Appendix

SOP 98-1 Simple Rules1.The nature of work in the Development Phase determines whether it will beCapitalized or Expensed:Expensevs.CapitalizationWhatPeople or thorityAsset-CriticalDecision tree:IFMinimum expected life of 3 years beneficial useNew software functionalityDesign/build/test cost results in the creation of a new asset of at least 100K costANDCompletion of preliminary (expense) phase with e-mail from TM or PM to finance approval as evidence of readiness for designstorming (triggering the development/capitalization phase)Any other Formal approvals of capital funding through designANDHigh probability that the product will be completed as plannedWork effort is directly related to asset /product design, development , testing or implementation/integration (except foradministration, overhead, training and data conversion costs) (see WBS task detail for more clarification)CAPITALIZEELSEExpense39

Accounting Glossary AcSEC – AICPA’s Accounting Standards Executive CommitteeSEC – Security and Exchange CommitteeEITF – SEC’s Emerging Issues Task ForceGAAP – Generally Accepted Accounting Principles from theAmerican Institute of Certified Public Accountants (AICPA)SOP 98-1 – American Institute of Certified Public Accountant’sStatement of Position Accounting for the cost of ComputerSoftware Developed or Obtained for Internal Use – issued on2/27/1998 which all non governmental public or privateorganizations must follow and which are now part of GAAP. SOP98-1 standardizes how organizations measure and report theirinvestments

Agile Glossary Quickstart – High level Analysis and Requirements Capture Customer Evaluations– Identify customer preferences– Eliminate bad ideas Inception Deck––––––––Charter: Organizational and Departmental ObjectivesBusiness & Technical Outcome Vision (“What” & “How”)In Scope / Out of Scope and Context DiagramHigh Level Risks and Project Approach and EstimatesStakeholder AgreementsRelease Plan and Staffing PlanProject Organization and Management StructureTrade Off Sliders Treatment– Solution Description and Metrics of Success– High level functionality matrix and impact analysis– Assumptions and Questions– Estimated durations / costs / budget / contingency– High level resource plan

An Agile Approach . . . Step 1: Paradigm shift: let’s suspend our knowledge of the differences between Agile and Waterfall .and take a new look at the “waterfall centric” project stage framework through an Agile lens Step 2: Adopt an Agile Project Stage Framework Step 3:

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